February 5, 2026Israel: Staff Concluding Statement of the 2026 Article IV Mission

February 5, 2026

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or 'mission'), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF's Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Jerusalem, Israel:

Economic outlook and risks

1. Assuming no renewed hostilities, growth is projected to strengthen in the near term. Staff expect output growth to increase from 2.9 percent in 2025 to 4.8 percent in 2026, driven by pent-up private consumption and a rebound in investment, while government consumption declines. Inflation is expected to decelerate to slightly below 2 percent by mid-2026 as demand pressures are more than offset by the lagged effects of the shekel appreciation and easing capacity constraints. Over the medium-term, staff project growth at around 3.5 percent, down from 4 percent pre-conflict, reflecting the lingering conflict-related effects-including elevated defense spending and mobilization, higher risk premia, and reduced availability of non-Israeli workers. These effects compound pre-existing structural challenges, such as falling working-age population growth and low labor market participation and skills among specific groups.
   
2. Risks to the outlook are tilted to the downside. A resumption of regional conflicts is the key concern. It would raise risk premia, tighten supply constraints, increase net emigration, depress investor and consumer confidence, and thereby weaken growth while raising inflation. On the upside, progress beyond the Gaza ceasefire that improves regional security and expands participation in the Abraham Accords could create new trade and investment opportunities. Large-scale demobilization would boost labor supply, while improved sentiment could spur investment and growth.

Restoring fiscal buffers amid higher defense spending

1. The fiscal position has deteriorated sharply following the conflict, although consolidation measures helped contain the deficit. The central government balance swung from a surplus of 0.6 percent of GDP in 2022 to a deficit of 6.8 percent in 2024, driven by surging defense spending and weaker revenue. In 2025, consolidation measures helped reduce the deficit to 4.7 percent of GDP-still well above the pre-conflict average of around 2.5 percent (2013-22, excluding 2020). Public debt rose from 60 percent of GDP at end-2022 to 68.6 percent at end-2025.
   
2. The draft 2026 Budget deficit ceiling of 3.9 percent of GDP is a step in the right direction, but insufficient to place the public debt ratio on a downward trajectory. Defense spending is expected to decline from 8 percent of GDP in 2025 to 6 percent-still well above the pre-conflict level of around 4.5 percent of GDP-while interest expense continues to increase. Revenue measures are broadly neutral: middle-class income tax cuts through wider brackets are largely offset by higher property and bank profit taxes. At this deficit level, public debt will continue to edge upward. Given upside risks to the deficit-including uncertainty around revenue estimates (notably tax collections from the Wiz transaction) and the potential for renewed regional conflict-it is important that the 2026 Budget does not exceed the ceiling. A deficit below the ceiling would help contain the upward pressure on the debt level.
   
3. Beyond 2026, additional measures will be required to rebuild fiscal buffers. Prior to the conflict, the authorities reduced public debt from over 70 percent of GDP in the late 2000s to 60 percent in 2022, creating space to respond forcefully to the economic shock without unduly undermining credibility. Staff project that, absent further adjustment, public debt will continue rising with risks skewed to the upside. As a consequence, civilian spending could come under increasing pressure from elevated defense and interest expense. Staff recommends additional consolidation to ensure the authorities' proposed deficit ceiling of 2.4 percent of GDP by 2029 is met. This would place debt on a firm downward trajectory toward 60 percent by the mid-2030s. The fiscal adjustment should prioritize revenue measures, given already low civil spending relative to OECD peers.

• Revenue measures. Options with smaller fiscal multipliers and downside effects on GDP growth include: (i) aligning the lowest two personal income tax brackets at 14 percent; (ii) rationalizing tax exemptions; (iii) expanding taxes on negative externalities (e.g., single-use plastics); and (iv) increasing VAT. The tax system is complex, with numerous incentives and differential sector- or region-specific treatments (e.g., excess-profit taxes on banks could undermine investor confidence). A comprehensive review of the tax system, including tax expenditures, is needed to enhance simplicity, efficiency, and equity.
• Expenditure measures. The authorities should consider: (i) launching a spending review to identify the scope for rationalizing recurrent spending, including administrative expenditures and social benefits, and (ii) improving the efficiency of public investment.

Advancing the longstanding structural reform agenda

1. Stepping up structural reforms is urgent to lift labor supply and productivity, aimed at restoring pre-conflict growth potential and supporting fiscal consolidation. Priorities include raising participation and skills among fast-growing Haredi and Israeli-Arab populations, strengthening the business environment, and enhancing Israel's competitive edge in high-tech and AI.

• Boosting labor supply and closing skill gaps, particularly among Israeli-Arab women and Haredi men: The government's 2022-26 Economic Plan for Reducing Gaps in Arab Society (Taqadum) has supported improvements in Israeli-Arab communities, including higher female employment, better education outcomes, alongside improved infrastructure, housing, and local government capacity. Building on this progress, a successor program should be launched in 2027 to further narrow structural socioeconomic gaps. For Haredi men, however, progress has been limited despite multiple initiatives. More decisive action is needed, including enforcing core curricula in mathematics, science, and English, expanding vocational and technological training, and redesigning fiscal incentives to encourage labor market entry.
• Improving the business environment through product market reforms and infrastructure investments: Israel has taken several steps to enhance competition and facilitate trade, recently including reforms in alignment of import procedures with EU standards. Streamlining regulatory requirements (e.g., company registration) and reducing entry barriers in professional services would enhance competition and business dynamism. Infrastructure investment, especially in transport, must keep pace with population growth. Given reliance on public-private partnerships, contingent liabilities require careful monitoring and management.
• Enhancing Israel's competitive edge in high-tech and AI: This requires continued alignment of workforce skills with evolving needs. Priorities include expanding STEM enrollment, updating math and science curricula, introducing AI education early, and closing access gaps for underrepresented groups. While AI enhances productivity, the transition may entail job displacement, calling for well-designed active labor market policies. To this end, the authorities are encouraged to develop a lifelong learning strategy, covering reskilling, upskilling, and mid-career training.

Ensuring price and financial stability, and strengthening financial integrity

1. The still moderately tight monetary policy remains appropriate, helping reduce inflation. With inflationary pressures and supply constraints easing, it is appropriate to gradually reduce the policy rate toward neutral by year-end. However, inflation risks remain tilted to the upside, due to a tighter-than-expected labor market, stronger cyclical demand, and potential geopolitical escalation. Staff therefore recommend that the BOI stand ready to adjust course if incoming data and the evolving risk environment indicate meaningful deviations from the baseline.
   
2. The financial system remains stable, with banks well-capitalized, liquid, and profitable, but vulnerabilities persist. Prudent and proactive supervision has helped preserve stability during the conflict. Non-performing loan ratios are low, but banks' sizable exposure to real estate poses risk, especially as the ongoing housing-market adjustment-marked by weakening prices and transactions-could be amplified by renewed regional conflict.

• Banking sector policy. Supervisors should (i) continue close monitoring of financial risks, especially concentrated real-estate exposures ,and (ii) maintain robust prudential requirements, adjusting them as risks evolve. Staff caution against the government's proposal to subsidize existing mortgages: delinquencies remain low, and subsidies would weaken monetary transmission, entail fiscal costs, be regressive, and raise moral hazard concerns.
• Stress testing. The BOI is encouraged to develop liquidity stress testing frameworks. Separately, the bank-insurance stress tests, recently conducted jointly by the BOI and the Capital Market and Insurance Authority, are welcome. The authorities should regularly conduct such system-wide stress tests and broaden their scope to include liquidity risks.
• Nonbank financial institution (NBFI) supervision. Close monitoring should continue as non-bank mortgage lending-though still small-continues to grow. Extending borrower-based measures to NBFIs should be considered.
• Basel III and resolution frameworks. Staff welcome ongoing work to implement international standards. However, overall capital requirements should be preserved, and the authorities should consider setting the neutral counter-cyclical capital buffer at a positive level. The legal reform strengthening the BOI's resolution powers is important and should proceed expeditiously.

1. Efforts to enhance bank competition through new entries should proceed cautiously, with due regard to financial stability. The authorities' plan to introduce a tiered bank licensing framework based on proportionality could improve contestability. However, risks may arise, especially from entrants with limited risk management capacity, potential regulatory arbitrage, or broader competition-stability trade-offs. Robust regulatory and supervisory standards must be maintained, and all deposit-taking institutions should remain under BOI supervision.
   
2. Strengthening of the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) framework should continue. The authorities are making progress in several reforms, including legislative changes for the real estate sector and measures to strengthen the beneficial ownership regime for legal persons. These reforms are now before the Knesset. The update of the National Risk Assessment should be finalized by year-end. The authorities should further enhance the risk-based approach, apply dissuasive sanctions for non-compliance with AML/CFT preventive measures and confiscation, and ensure that beneficial ownership information in relevant registries is adequate, accurate, and up to date.

The mission thanks the authorities and private sector counterparts for their warm hospitality and candid and high-quality discussions. The IMF team is especially grateful to the Bank of Israel for its assistance with meeting and logistical arrangements.

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